Overtime Pay Should Be Included Within Holiday Pay

The Employment Appeal Tribunal (EAT) has ruled that payments in respect of regular non-guaranteed overtime should be included as part of a workers’ holiday pay. This decision follows hot on the heels of a recent decision by the European Court of Justice (ECJ) that commission payments should be included as part of a workers’ pay.

Non-guaranteed overtime relates to the additional hours which workers are obliged or required to work when it is offered to them, but those which businesses are under no such obligation to offer. It had already been decided that guaranteed overtime should be included within holiday payments. However, this decision has confirmed that if overtime constitutes part of the worker’s ‘normal’ pay, in that it is carried out sufficiently regularly, this should be used to calculate their holiday pay.

The rationale of the EAT and ECJ in making these decisions is that the Working Time Directive (WTR) is intended to ensure that all workers are provided with minimum rest periods. Those workers who regularly receive commission payments or who work overtime may be less-inclined to utilise their full holiday entitlement on the basis that they would lose money in commission or overtime payments. These decisions are therefore intended to removing any financial barriers to discouraging workers from taking their statutory holiday entitlement.

The EAT has not yet provided clear guidance as to how holiday pay is to be calculated. It is presumed that this may be done by taking the previous twelve weeks’ of a worker’s holiday, calculating their average daily pay and using that as the basis for holiday pay. Further, whilst the definition of ‘normal’ pay has not been clearly confirmed, this is likely to be where the pattern of work is settled and/or regular.

It is important to note that the entitlement to receive the additional holiday payment in respect of overtime applies only to the basic four weeks’ leave granted under the WTR. As such, the remaining eight days statutory holiday provided under the WTR since 2009, together with any enhanced contractual holiday entitlement offered to the worker, will not have to include any additional payment in respect of the overtime that the worker may have received.

Workers will now have the right to bring claims for any backdated additional holiday pay they may be entitled to receive. Any claim for arrears of holiday pay can be made by the worker if the underpayment, or last in a series of underpayments, happened more than three months previously; the worker will be ‘out of time’ if there has been a break of more than three months between successive underpayments.

Following this ruling, Business Secretary Vince Cable has announced he is setting up a new taskforce to assess the impact of the ruling. The Institute of Directors has already commented that this decision is likely to dissuade businesses from offering overtime to their workers, suggesting that if offering existing staff overtime becomes too expensive, businesses will either cut back on the work they take on, or take steps to use more agency staff or contractors.

In my view, the decision reached by the EAT appears to be a rational and reasonable one. However, allowing employees to backdate these claims seems an unnecessarily punitive measure in the circumstances as it will now penalise businesses who, until this ruling, were complying with the relevant legislation. The decision also has the possibility of causing both businesses and workers to suffer financial loss in the future; businesses may simply reduce the offer of overtime, not only because of the additional cost but also the additional administrative time, hassle and cost in calculating the worker’s holiday pay based on their previous earnings.

As this decision has such profound implications for employers, it is likely that this decision may be appealed and that this may not be the last that we hear of this matter.

In the meantime, if you have any queries regarding holiday pay, please contact me or any of our Employment team on 01908 660966 or on employment@franklins-sols.co.uk.

Franklins are one of the premier law firms in Northampton and Milton Keynes. Our lawyers specialise in all types of legal services throughout Buckinghamshire and Northamptonshire, including corporate and commercial solicitor services.

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